Oregon Supreme Court eases the path to hold insurers accountable for bad-faith practices2020-04-23T00:34:37+00:00
11.20.2015 // THE POLICYHOLDER REPORT
Oregon Supreme Court eases the path to hold insurers accountable for bad-faith practices

Yesterday the Supreme Court of Oregon overruled Stubblefield v. St. Paul Fire & Marine (1973) and paved the way for a more commonsense approach to negotiating stipulated judgments. Stipulated judgments have been a well-worn, though somewhat perilous, mechanism for insureds to resolve liability claims against them when their insurers defend in bad faith. In doing so, however, the parties to the stipulated judgment were tasked with navigating needlessly technical steps along the way. In Brownstone Homes Condo. Ass’n. v. Capital Specialty Ins. Co., the court removed one of the insurer’s “gotcha” defenses to an otherwise valid stipulated judgment.

Stipulated judgments are an effective weapon against abusive insurers in Oregon. They are employed effectively in cases where an insured is sued and the insurer defends that lawsuit in bad faith, including refusing to settle those claims against the insured, and thus exposing the insured to personal liability. Because a defending insurer is obligated to treat its interest at least equal to that of  its insured, it is obligated to reasonably settle claims against its insureds. The problem often arises where the insurer refuses to negotiate in good faith, leaving the insured responsible for a large percentage of any proposed settlement or final judgment. Stipulated judgments allow the underlying plaintiff and the insured (the defendant in the lawsuit) to agree to an amount of liability, enter that judgment with the court, and agree that the plaintiff will not execute the judgment against the insured in return for an assignment of the insured’s bad faith claims against its insurer.

In Stubblefield, the court declared that when a liability policy covers damages that an insured is “legally obligated to pay” (as most do), and the insured agrees to enter into a stipulated judgment against it in exchange for the plaintiff’s covenant not to execute the judgment against the insured, that settlement eliminates the liability of both the insured and the insurer. Therefore, parties to a stipulated judgment had to be very careful about not completely eliminating the insured’s liability—the result of which is the use of unnecessarily complicated language preserving the plaintiff’s right to come back later and execute the judgment against the insured under certain circumstances. Until yesterday, Oregon stood virtually alone on this issue.

Following Stubblefield, the Oregon legislature passed ORS 31.825, a statute designed to allow an insured to assign claims against its insurer to a plaintiff and receive assurances that the plaintiff would execute the judgment only against the insurer. The statute, however, contains strict timing requirements dictating the order in which the settlement agreement, judgment, and assignment must take place. The results of any failure to abide by these strict requirements was recently illustrated by A&T Siding v. Capital Specialty Ins. Co., which rejected amendments to remedy technical errors in the documents that are required to complete the stipulated judgment. If the timing was incorrect, or language was used that implicated Stubblefield, the plaintiff could be left without any way to get the settlement paid.

The court yesterday revisited the “legally obligated to pay” provisions in a liability policy and the effect of that language on a stipulated judgment. The court adopted the near uniform treatment of this provision by other courts, holding that a covenant not to execute the judgment against the insured is by no means an extinguishment of the insureds’ legal obligation to pay the judgment. Rather, the covenant is only an agreement not to execute on the judgment as opposed to a release from that judgment. As a result, the Brownstone court made it that much easier to hold insurers accountable for their bad-faith conduct—a welcomed result for all policyholders.

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Ball Janik LLP was founded in 1982 with six lawyers and a four-person support staff in Portland, Oregon. Since our firm’s inception, we have expanded our capabilities, our professionals, and geographic footprint. What started as a firm focused in real property and land use (known then as Ball Janik & Novack), has grown to include the insights of a team of 30-plus attorneys, with a combined six centuries of experience, and capabilities including Real Estate and Land Use, Construction Defect, Commercial Litigation, Insurance Recovery, Construction and Design, Employment, Finance and Corporate, Public Agencies and Schools, and Community Associations. With offices in Florida and Oregon, our regional growth has earned us a national reputation for upholding the rights of our clients.

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Heather J. Oden
Oregon , Portland
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